Pension funds are still under-hedged against movements in interest rates and inflation, despite an improvement in their finances due to a rise in long term interest rates, according to actuaries Aon Hewitt.

John Belgrove, a senior partner at Aon Hewitt, said that closed and frozen pension schemes should be protecting against about 70% of their exposure to falling interest rates. He said the actual level of hedging was between 30% and 40% – a difference of about £400 billion.

Belgrove, who was speaking on the sidelines of the National Association of Pension Funds’ conference in Edinburgh, said a significant rise in expectations for long term interest rates last year had benefited pension funds’ finances – but there was no reason to assume rates would continue to rise as much as the market currently expects. He said: “While it is true that short term rates haven’t moved, long term rates have moved up more than many expected, so now may be a good time to start taking more of this risk off the table.”

On Wednesday, BlackRock chief executive Larry Fink warned pension funds at the conference against safe but low-returning investment strategies, which would not help schemes meet the cost of rising life expectancy.

However, Belgrove said that hedging against interest rate movements did not have to mean forgoing higher returns, as hedging strategies could be implemented using interest rate swaps, or bond repos, both of which allow investors to cover most of their liabilities using only a portion of their assets.